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Games: From Kyoto to Cooperation Peter Cramton and Steven Stoft, September 7, 2010
Abstract
This paper reviews the literature on the
non-cooperative equilibria of the international cap-and-trade game. Because such
games can actually increase total emissions and typical polarize abatement
commitments, they are unsuitable instruments for climate policy.
In
the same setting where the international cap-and-trade game increases total
emissions, a game to select a single global emission target induces optimal
abatement. However, the use of a global quantity target is ruled out because it
cannot be agreeably allocated among countries. A global price target results
in a similarly cooperative outcome to a global quantity target, and there is
agreement that national carbon prices should equal the global target.
Global
agreement on a suitably high price target requires linking Green-Fund payments
to the level of that target. This induces rich and poor countries to favor
the same, nearly-optimal price. The full Green-Fund game is a three-stage
repeated game. The first stage determines the Green-Fund linkage parameter.
The second stage uses that parameter to influence the “votes” for the global
price target.
In
the third stage countries implement the price target in the context of a
global market for “price credits.” A treaty is needed to implement voting
rules and market rules for price credits, but it should not directly set the
Green-Fund payment level or the global price target.
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